Old Navy to open 60 stores this year, driving Gap's growth

Key Points
  • Gap will open 60 more Old Navy stores across North America in 2018.
  • The apparel retailer is making a bigger investment in Old Navy, along with Athleta, as it shutters some of its Gap and Banana Republic locations.
Old Navy store in Broomfield, Colorado.
Rick Wilking | Reuters

Gap is making a big bet on Old Navy.

The discounted apparel brand will add 60 more stores across North America this year, pushing its total to more than 1,000 Old Navy locations in the U.S. by the summer. Gap, which also owns the flagship Gap banner, Banana Republic and Athleta, currently operates more than 3,500 stores globally.

Gap is meanwhile trimming back its fleet of Gap and Banana Republic stores, which haven't performed as well as Old Navy and Athleta of late. It's all part of the retailer's updated growth strategy announced late last year, which called for roughly 200 Gap and Banana Republic stores to close by 2020.

"If you think about it, the real estate we have exited tends to be clustered at some of the older ... malls that the customer isn't as excited about anymore," Gap CEO Art Peck told CNBC. "We've moved to where the customer is," which tends to be more open-air centers and street-level retail, he said.

In addition to opening new locations, Old Navy will also be remodeling roughly 150 stores over the next few months. The majority of those locations will get upgraded fitting rooms, bathrooms and checkout areas, among other more modern fixtures. About 10 percent of the 150 stores, though, will receive a full makeover. Three stores are being entirely rebuilt due to hurricane damage.

"We're really focused on technology that delivers a meaningful benefit to customers," Peck said. That includes making upgrades to the retailer's mobile apps, allowing shoppers to check available stock in stores, quickly browse customer reviews on items and keep track of loyalty points. The company is also trialing "buy online pick up in store" in a handful of locations.

Old Navy's moves come as apparel retailers across the U.S. have been fighting to keep pace with, which is positioned to this year to become the No. 1 clothing retailer in U.S., according to Morgan Stanley.

"I have huge respect for what they're doing," Peck said about Amazon. "I would characterize [] as excellent and hyper-efficient for buying, but it's not a great discovery platform. ... And a big part of fashion apparel is discovery."

Faced with mounting competition, Gap has been dialing back on excessive promotions for some of its brands and keeping a closer watch on inventory. It's also been pushing Old Navy for shoppers who enjoy browsing off-price retailers like T.J. Maxx and Ross Stores in search of a deal.

"Old Navy and Athleta remain attractive bright spots," Cowen and Co. analyst Oliver Chen wrote in a note to clients last week. "Overall, in our view, these two brands will continue to be the cornerstone of growth for GPS and we like the strategic shift in store footprint towards these two brands."

Chen said that if the two labels "can continue impressive year-on-year momentum," Gap's earnings should go higher.

In the most recent quarter, same-store sales at Old Navy jumped 9 percent, driving an overall same-store sales increase of 5 percent for Gap Inc.

Gap's stock is up about 13 percent from a year ago.